Apple's Tim Cook: What Analysts Miss - InformationWeek
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Apple's Tim Cook: What Analysts Miss

Apple's manufacturing power is now entrenched in China. Expect that to change as the new CEO helps reinvent the company, again.

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iPad Mini Tablet: Visual Tour
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Listening to the analysts on the business channels, you'd think Apple's future is based on things like iPhone maps functionality or the success of the iPad Mini. They're wrong. Apple, as well as most companies producing consumer-oriented products in China, have a much larger problem looming: Will they be able to produce their products to meet market demand?

Boston Consulting Group released a paper last year titled "Made in America, Again," in which it made the case that China will lose its low-cost manufacturing position by 2015. BCG's analysis shows a 15% to 20% annual increase in labor costs in China, as well as continued appreciation of the yuan, further eroding the country's cost advantage. Trans-ocean freight costs will continue to rise. China's economic advantage is quickly evaporating.

Consider other events and trends in China. In recent years we've seen exposures of the abusive working conditions in Chinese factories. Easily preventable explosions in die cast factories have caused deaths, and there have been reports of suicides. The Chinese people, weary of polluted air and water, expect their government to do something about it. Recently, there have been reports of riots and worker strikes in Chinese factories. As manufacturers withdraw to cheaper and friendlier locations, there will be massive labor unrest in China. The clash between capitalism and communism will take years to sort out.

When the crisis becomes obvious, manufacturers will scramble to find a new home to produce their products. Most will simply search for the next location with low labor costs and nonexistent environmental and labor laws. Apple will choose a different route.

This is where Tim Cook comes into the picture. Cook's skill set is unique among CEOs of high-tech consumer product manufacturing companies. A master of logistics, he's credited with reengineering Apple's supply chain to increase profit margins while allowing for more flexibility to produce new products and make changes on the fly. His educational background in industrial engineering, coupled with an MBA, provides him with a toolbox the average CEO doesn't have. His previous career positions at Compaq and IBM provided valuable experience in producing high-volume high-tech products.

It would be easy to envision that under Cook's leadership, there's a skunk works deep inside of Apple looking for the solution--the marriage of innovative product design with innovative manufacturing. In all likelihood, Apple is using its silicon chip design skills to combine product functionality into fewer and fewer components. It's using its uncanny ability to simplify products to be more user friendly to simplify the manufacturing of those products. It's using its patents and expertise in areas such as liquid metals to find materials to create products that will excite customers as well as create unique production opportunities. The result will be a few subassemblies with minimal fasteners and electronic cables that will come together using flexible automation.

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While other companies will search the world to duplicate the low costs enjoyed in China, Apple will reinvent itself, again--this time as an agile, low-cost manufacturer. It will derive even higher profit margins and get products to market faster than its competitors. Apple will find locations that respect patents and intellectual property rights, allowing it to enjoy the fruits of its innovations for a longer time. It will control and manage more of the product life cycle than any of its rivals.

The pundits and experts wanted the next CEO of Apple to be just like Steve Jobs, who was always ahead of the pundits and experts. Perhaps Jobs looked into the future and saw the challenges and opportunities that Apple faces. Keenly aware that Apple had grown into a large and complex company, Jobs knew better than anyone what skills the next CEO would require. And he groomed Tim Cook for the job.

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User Rank: Apprentice
4/23/2013 | 3:46:58 PM
re: Apple's Tim Cook: What Analysts Miss
Great article, Lee.

It will be interesting to see a trend for manufacturing to come back 'home" to the US. Perhaps the great outsourcing trend is over as China's economy and society matures. But there is one thing I do see that would spark US-based manufacturing: 3D printing. It may just usher the "Made in the USA" movement!

Thanks for the post.
User Rank: Apprentice
10/26/2012 | 6:43:19 PM
re: Apple's Tim Cook: What Analysts Miss
Chief executives at some of the nation's largest companies earned an average of $12.9 million in total pay last year -- 380 times more than a typical American worker, according to the AFL-CIO.
User Rank: Strategist
10/25/2012 | 6:14:29 PM
re: Apple's Tim Cook: What Analysts Miss
I may be a bit naive but I completely disagree with the comment below. Apple sells most in US. It makes sense to build them here when no one else is doing so. As stated their manufacturing process will be streamlined to increase profits. Made is U.S.A. at a time when the us is struggling will be a huge marketing boost which sell even more units. Also workers will take these jobs without unions and while not rock bottom pricing the factories will be competitive. Lower cost of transportation and ability to change and modify design on the fly will add value. As for overseas markets they will build in countries of origin like Toyota giving them the same flexibility they would have here and also be able to capitalize on the marketing aspect of built in said country. Maybe I am nuts but to me this is the only strategy that makes sense. The days of exploiting cheap labor are going to end. It may take a while but eventually the people making these things are going t want them too. You can't have a cheap educated labor force for too long even with Communist oppression. Just my take. Oh and robots are good but we have a large unemployed skilled workforce waiting for more jobs. Say what you will about American work ethic,we can build quality products. We just don't like being ripped off when CEO is making 100 times the average worker
Samir Shah
Samir Shah,
User Rank: Apprentice
10/25/2012 | 4:27:34 PM
re: Apple's Tim Cook: What Analysts Miss
When people start getting cellphones one of the first things they do is to start questioning their poverty. This will happen in China, Brazil wherever there are Foxconn plants.

A few years ago Apple did something which everybody thought was totally clueless, retail. Now everybody is aping Apple.

Apple should take next logical step, manufacturing. They should set up manufacturing plants at least in China and Brazil. The other countries that come to mind are India, Thailand, Philippines and Vietnam, even Russia and South Africa (BRICS). Why? Because, local content trade barriers are going to come up, like it or not. I am surprised that Apple is able to sell iPhones in China without doing a TD-SCDMA iPhone. 'Electronics' business is going to follow the 'auto' business. Just like you can never have a 100% HTML5 App, you can never have 100% automated tablet or phone manufacture so the dreams of robot manufacturing plants in US are what they are, dreams.

Regarding cargo transportation, Apple can buy Boeing 747s or Airbus A380s as needed and use them for her cargo needs.

Dear Tim. I may not have given an answer you wish to hear but I have given an answer that I think is the best for Apple long term.
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